Federal Inquiry of MF Global Escalates

Stephen Yang/Bloomberg NewsTaking a photo of a sign for MF Global, the bankrupt firm, at a Manhattan building.

Federal officials are escalating an investigation into MF Global, the bankrupt brokerage firm run by Jon S. Corzine, as the search continues for roughly $600 million in missing customer money.

The Commodity Futures Trading Commission, which first detected the missing money last week, decided to issue subpoenas to MF Global and demanded that the firm retain any documents that may be related to the investigation, according to people briefed on the situation.

The trading commission along with the Securities and Exchange Commission and exchanges like the CME Group are examining whether MF Global diverted customer money in recent days to support its own trades in a last-ditch effort to save itself — a serious violation of federal rules.

The Federal Bureau of Investigation has also joined the inquiry, according to a person with knowledge of the case.
The F.B.I. has only started its review of the matter, and there is still no indication that criminal laws were violated. An F.B.I. spokesman declined to comment.

Neither MF Global nor Mr. Corzine, the former governor of New Jersey and once a top executive at Goldman Sachs, has been accused of any wrongdoing.

In Federal Bankruptcy Court in downtown Manhattan on Tuesday, MF Global’s lawyers played down the missing money. Ken Ziman, one of the lawyers, said in the firm’s first hearing that banks or clearinghouses had been slow to produce the money.

“To the best knowledge of management, there is no shortfall,” Mr. Ziman said.

But regulators on Tuesday still could not locate the customer money, and the firm had not accounted for it.
The downfall of MF Global, and the growing federal investigation into the missing money, threaten to bruise Mr. Corzine’s reputation. After losing his bid for re-election as New Jersey’s governor in 2009, ending a decade-long run in politics, Mr. Corzine returned to Wall Street, landing at MF Global in March 2010.

In his new role, Mr. Corzine sought to transform MF Global from a sleepy brokerage firm into a high-flying Wall Street presence reminiscent of his former employer, Goldman Sachs. He started buying debt from Italy, Ireland and other troubled European nations at a discount.

Amid the continuing sovereign debt crisis, the holdings alarmed investors and led to widespread concerns about the health of MF Global. By the last week of October, the stock was in free fall and Mr. Corzine moved to strike a deal to sell off all or part of the firm.

Early Monday, MF Global disclosed to regulators that it had failed to segregate clients’ accounts, breaking fundamental Wall Street rules. The revelation of missing money dashed a potential deal and propelled the company into Chapter 11 bankruptcy.

While it is unclear where the money went, some of the money is expected to turn up as MF Global sorts through the bankruptcy process.Little, if any, money trickled in on Tuesday, however, according to two people briefed on the matter, and roughly $600 million in unaccounted assets remained.

As of Tuesday night, regulators were still at MF Global’s headquarters poring over the firm’s books, according to people briefed on the matter. They are, in part, examining whether MF Global used customer money to satisfy demands from trading partners that the firm produce more cash to meet its financial obligations.

Exchanges, too, are increasing the pressure on MF Global to come up with the assets.

CME, the giant exchange where MF Global conducted business until Monday, said it was investigating the missing money. With special permission from regulators, CME was planning to take the unusual step of transferring MF Global’s customer accounts to other brokerages, potentially without all of the money, according to a person briefed on the matter.

“While we are unable to determine the precise scope of the firm’s violation at this time, we are investigating the circumstances of the firm’s failure,” Craig Donohue, CME’s chief executive, said during the exchange’s earnings call on Tuesday.

“We recognize that yesterday was a very difficult day for all concerned,” Mr. Donohue added. “As is nearly always the case in matters like this, this is a very fluid situation involving complex legal, regulatory and bankruptcy related issues.”

To keep the firm running during the Chapter 11 proceedings, lawyers for MF Global sought approval for several initial motions in bankruptcy court on Tuesday. The presiding judge, Martin Glenn, agreed to let MF Global use $8 million of its remaining $26 million in cash for essential operations, like salary for a skeleton staff. MF Global can use the funds until Nov. 14, at which point the firm would need additional approval.

MF Global said it would try to find extra cash in its operations and raise money by liquidating assets. Mr. Ziman said that the firm was also searching for a lender to provide bankruptcy financing.

As part of the hearing, MF Global also reached an agreement with JPMorgan Chase, the firm’s chief unsecured creditor, which had laid claim to most of the firm’s $26 million in cash. By letting MF Global use some of the money, JPMorgan argued, it was being pressed into providing an involuntary bankruptcy loan.

To assuage those fears, MF Global agreed to cover some of JPMorgan’s legal fees.

“This is a lifeline for the enterprise,” Mr. Ziman said at the hearing.